Why be optimistic a deal can be struck on the fiscal cliff? Because there are weak links in the Congressional strongholds. Not only has the GOP shown some willingness to negotiate, but there are also a handful of Democratic senators up for re-election in two years, hailing from largely traditional GOP red zones, who will want to keep their jobs. Look for at least a few of them to show “temperance” and move to the middle on the Fiscal Cliff.
Red-State Senate Democrats May Be Hard to Corral on Cliff– Bloomberg Businessweek
Interest payments will cost the government 3.1 percent of gross domestic product this year, according to Office of Management and Budget and International Monetary Fund data compiled by Bloomberg. That’s down from 4.8 percent in 1991, the highest in the past 50 years, during George H.W. Bush’s presidency. Since 1980, the only incumbent with a lower ratio than Barack Obama was George W. Bush in 2004.
I’m as for fiscal restraint as anyone, but as this blog has maintained for awhile, the notion the US is headed for imminent ruin tied to the deficit/debt simply isn’t true. With interest payments heading down, and near lows, insolvency isn’t on the table—heck, it’s not even the campaign issue it once was.
Around my office the last few weeks we’ve joked that—once this debt ceiling drama is finally resolved—politicians would take credit for “saving the world”. Well, it turned out not to be a joke:
Forget about the ideology and bombastics of these types of statements (which, by the way, come from both sides of the aisle). What this really demonstrates is the wanton and venal quality of the beltway: that this is in fact mostly a drama being played out on the public stage to use as a fundraising and general election issue.
To get the real skinny on the US debt, deficit, and debt ceiling situation, head to Marketminder.com and read these:
China is, as are much of the emerging markets, an investing land of opportunity today, no doubt. All I ask is a bit of skepticism here and there. After all, these guys are still commies.
This week, Chinese officials directed banks to stop making loans for the purchase of 3rd homes in cities with “excessive property price inflation”. China’s state council also said that local officials will be “held responsible” for determining which cities qualify as “excessive property price inflation” and for any failure to appropriately enforce these mechanisms.
(How’d you like to have your mayor suddenly say you can’t have a loan because your city is experiencing “excessive property price inflation”?)
Right now, China has an excess of commercial property and luxury homes, but a shortage of housing in general. Therefore, the state is attempting to significantly increase the supply of low-income housing this year to help facilitate the urbanization of its population. However, it is also increasingly cracking down on housing demand. Wealthy Chinese citizens have often parked significant levels of cash in the property market given their limited investment options (tied to strict capital controls) and low carrying costs due to no property taxes.
I shudder to think of US politicians tinkering with housing supply and demand. (Though, sadly, a lot of this goes on already in the US). Ultimately any asset in China (stocks, real estate, etc) is beholden to the whims of Chinese officials. And, ultimately, that kind of thing causes a lot of trouble at some point or another for society and capital markets. Capitalism has its booms and busts, but give me those over a bureaucratic figurehead at the helm any day.
A client recently asked about the Institute for Supply Management’s (ISM) index of non-manufacturing businesses, which makes up almost 90% of the US economy. How can that be the case when economists commonly say ~70% of the US economy is consumer spending?
The discrepancy comes from different methods of calculating GDP. There are three main methods. Each looks at a country’s output from different angles:
Expenditure: This is the most widely cited approach. It sums the total value of all final goods and services purchased in the US (or any country). Many will recognize the equation used for this one:
GDP=C (consumption) + I (investment) + G (government spending) + (X-M) (net exports).
Using this method, consumers (C) account for about 70% of GDP. In other words, consumers purchase about 70% of the final goods and services sold in the US , thus the common refrain consumers make up 70% of the economy. (Demand-side Keynesians love this one best.)
Value-Added (or Product or Output): This approach looks at GDP from the prospective of who’s producing the goods and services, not who’s buying them. It sums the value added at each stage production to come up with GDP. So consumers buy 70% of everything produced here, but non-manufacturing businesses make 90% of everything produced. (Supply-siders tend to love this one best, but it’s much less oft used in the mainstream.)
Income: The income approach sums the incomes of everyone involved in the production of goods and services. This one isn’t used as often either, but has its uses.
In theory, all three methods should produce about the same number. But statistical quirks alone create a lot of variability in practice. Ultimately, this is another case of making sure you understand what the data are saying—statistical methodology is one of the most common sources of economic bias.